Charting the continuing development of fintech

Perhaps one of the most notable effects of digital technology is the prevalence of fintech and its growing role in the daily life of their everyday users.

Technology-enabled financial services, or fintech, have revolutionized the financial services industry around the world in the span of a few short years. By offering new ways for financial institutions like banks to collect and use data, develop new investment assets, and extend services, fintech has influenced new financial products tailored to modern consumers, business models, markets, and even changed how people interact with their money.

It is undeniable that the constant advances in digital financial technology and banking facilitate the creation of more accessible and effective financial services that benefit the economy as a whole. In the World Bank’s (WB) recent report, Fintech and the Future of Finance, the organization delves into the tremendous shifts that were caused by advancements in fintech and highlighted the opportunities and risks brought about by the innovation.

“In developing economies, we can see tremendous progress in access to financial services. There has been a spectacular increase in the share of adults using financial accounts, which rose by 30 percentage points between 2011 and 2021 to 71%, is partly attributable to fintech developments such as mobile money,” the WB said.

The organization further noted that the share of adults making or receiving digital payments rose to 57% in 2021 from 35% in 2014, according to the latest round of World Bank Findex data surveys.

Fintech, WB found, is a net positive for the pursuit of economic expansion, poverty alleviation, and the elimination of the informal economy.

Notably, fintech is providing new opportunities for low-income people and small enterprises who lack access to traditional banking services.

Through the use of fintech, businesses and individuals are able to send and receive payments safely, as well as get access to a variety of savings, credit, and insurance products that can aid in business growth, risk management, and long-term financial planning.

Particularly relevant for a country like the Philippines is that the WB report found that remittance services, a crucial source of income for many families, are seeing their prices drop as a result of the fintech revolution.

According to the World Bank’s Remittances Price Worldwide data, the average cost of sending $200 via any service is roughly 6%, whereas using mobile money services costs less than 4%. This translates to increased household income, which can then be put toward more important priorities like food, healthcare, and education.

“This reduction in cost is possible because fintech is making the global financial system more efficient by overcoming geographic, physical, and social barriers and by making information more widely available to consumers and providers. The costs of serving poor people and small businesses, even in remote rural corners, has fallen sharply,” the WB said.

Pushing for more financially inclusive Philippines

Last year, the Bangko Sentral ng Pilipinas (BSP) rolled out an update to its National Strategy for Financial Inclusion (NSFI) 2022-2028, which builds on the gains of the previous strategy launched in 2015 and the advancements in fintech since then.

“The NSFI focuses on reducing disparities in financial inclusion; improving health and resilience; empowering consumers; and increasing access to finance micro, small and medium enterprises (MSMEs), including startups, and the agriculture sector,” Benjamin E. Diokno, then BSP’s governor and chairman of the Financial Inclusion Steering Committee, said.

Fintech and digital technology are integral to this strategy as the country’s fintech scene continues to garner much attention and investment. According to the report Fintech in ASEAN 2022 made by United Overseas Bank, PwC Singapore, and the Singapore Fintech Association, Filipino fintech startups raised roughly US$344 million in funding, accounting about 8% of overall fintech funding in ASEAN.

The continued investment in the space reflects investors’ optimism about the future of fintech in the market and ranks the country third in the region for fintech funding.

The central bank raised its target of making digital transactions comprise at least half of all retail transactions volume and onboard 70% of Filipino adults to the formal financial system by next year.

Much of this is due to the popularity of e-wallets and other digital wallet platforms among Filipinos. It is expected that there will be between 65 million and 76 million unique digital wallet users in the country by 2025, up from an estimated 25 million to 27 million in 2020. According to digital wallet GCash, approximately 80% of the country’s adult population uses their platform.

Moreover, the use of digital lending apps in the Philippines has increased dramatically in 2022, helping many people establish themselves in the financial sector. Such apps have been responsible for the growth of micro-lending in the country.

Major players like Union Bank of the Philippines (UnionBank) have done their part in promoting the banking industry’s digitization, with the lender even winning the “Digital Bank of the Year” recognition from The Asset Triple A awards for the sixth year in a row in 2022.

Ultimately, the digital transformation is driven by demand and having consumers be at the core of the change. UnionBank President and CEO Edwin R. Bautista said that “without customer centricity, innovation could become an end and not a means to an end. Often, we need to remind ourselves, lest we forget and get carried away—that Digital Transformation is anchored on having the customer at the center.”

The BSP’s decision to award banking licenses to virtual banking services in 2021 will further promote digital financial services among Filipinos. The six licensed digital banks, namely Tonik, Maya Bank, UnionDigital Bank, GoTyme Bank, Overseas Filipino Bank (the digital banking division of LANDBANK), and UNO Digital Bank, all accounted for 1.4 million transactions worth P8.45 billion in electronic payments and financial services in the first half of 2022.

However, the WB cautioned against letting fintech grow unmonitored, as it brought with it significant risks to a country’s consumers, businesses, and the broader financial system, such as creating challenges to competition, financial stability, integrity, consumer and investor protection, and data privacy.

“New areas of market concentration could impede future competition. Digital lending outside credit reporting systems may result in over-indebtedness among poorer consumers. Unregulated or under-regulated fintech and big tech firms may abuse their access to consumer data and market power. Crypto-assets, which have been shown to be very volatile, are marketed to investors and customers who may not fully understand the significant risks in these markets,” WB noted.

“The growing risks of technology and new business models could overshadow the gains that fintech provides if regulators and supervisors don’t fundamentally change the way they oversee the financial system. They need to shift to an approach more focused on risk and type of service, rather than on type of institution,” it added.

For an emerging market like the Philippines, WB advised regulators and supervisors to closely monitor firms under supervision and create structured frameworks to identify fintech companies large enough to undermine the health of the financial system and plan for how to deal with potential failures of such firms. — Bjorn Biel M. Beltran